Question 1

Which of the following statements is incorrect regarding how beta is calculated?

Accepted Answer

A) The company return is the independent variable. 
B) The market portfolio return is the dependent variable. 
C) Using the oldest data possible will yield the most accurate results. 
D) All of these statements are incorrect. 
A) The company return is the independent variable. 
B) The market portfolio return is the dependent variable. 
C) Using the oldest data possible will yield the most accurate results. 
D) All of these statements are incorrect.

Question 2

You have a portfolio with a beta of 3.1. What will be the new portfolio beta if you keep 85 percent of your money in the old portfolio and 15 percent in a stock with a beta of 4.5?

Accepted Answer

A) 3.31 
B) 3.51 
C) 3.61 
D) 3.71 
A) 3.31 
B) 3.51 
C) 3.61 
D) 3.71

Question 3

Which of the following is correct?

Accepted Answer

A) Hedge funds often sell stock they don't even own. 
B) Hedge funds maintain secrecy about their holdings, trading, and strategies. 
C) Hedge funds are limited to sophisticated investors. 
D) All of these statements are correct. 
A) Hedge funds often sell stock they don't even own. 
B) Hedge funds maintain secrecy about their holdings, trading, and strategies. 
C) Hedge funds are limited to sophisticated investors. 
D) All of these statements are correct.

Question 4

A company has a beta of 3.75. If the market return is expected to be 20 percent and the risk-free rate is 9.5 percent, what is the company's required return?

Accepted Answer

A) 33.250 percent 
B) 39.375 percent 
C) 48.875 percent 
D) 55.625 percent 
A) 33.250 percent 
B) 39.375 percent 
C) 48.875 percent 
D) 55.625 percent

Question 5

If the risk-free rate is 8 percent and the market risk premium is 2 percent, what is the required return for the market?

Accepted Answer

A) 2 percent 
B) 6 percent 
C) 8 percent 
D) 10 percent 
A) 2 percent 
B) 6 percent 
C) 8 percent 
D) 10 percent

Question 6

Which of these is the set of probabilities for all possible occurrences?

Accepted Answer

A) Probability 
B) Probability distribution 
C) Stock market bubble 
D) Market probabilities 
A) Probability 
B) Probability distribution 
C) Stock market bubble 
D) Market probabilities

Question 7

How might a large market risk premium impact people's desire to buy stocks?

Accepted Answer

A) Investors with high risk aversion will be less willing to invest in stocks. 
B) Investors with high risk aversion will be more willing to invest in stocks. 
C) It will only impact the share prices. 
D) None of these statements are correct. 
A) Investors with high risk aversion will be less willing to invest in stocks. 
B) Investors with high risk aversion will be more willing to invest in stocks. 
C) It will only impact the share prices. 
D) None of these statements are correct.

Question 8

Which of the following is typically considered the return on U.S. government bonds and bills and equals the real interest plus the expected inflation premium?

Accepted Answer

A) Required return 
B) Risk-free rate 
C) Risk premium 
D) Market risk premium 
A) Required return 
B) Risk-free rate 
C) Risk premium 
D) Market risk premium

Question 9

Which of the following are the stocks of small companies that are priced below $1 per share?

Accepted Answer

A) Bargain stocks 
B) Hedge fund stocks 
C) Penny stocks 
D) Stock market bubble stocks 
A) Bargain stocks 
B) Hedge fund stocks 
C) Penny stocks 
D) Stock market bubble stocks

Question 10

You have a portfolio with a beta of 1.25. What will be the new portfolio beta if you keep 80 percent of your money in the old portfolio and 20 percent in a stock with a beta of 1.75?

Accepted Answer

A) 1.00 
B) 1.35 
C) 1.50 
D) 3.00 
A) 1.00 
B) 1.35 
C) 1.50 
D) 3.00

Question 11

Investor enthusiasm causes an inflated bull market that drives prices too high, ending in a dramatic collapse in prices is known as:

Accepted Answer

A) behavior finance. 
B) efficient market. 
C) privately held information. 
D) stock market bubble. 
A) behavior finance. 
B) efficient market. 
C) privately held information. 
D) stock market bubble.

Question 12

Stock A has a required return of 12 percent. Stock B has a required return of 15 percent. Assume a risk-free rate of 4.75 percent. Which of the following is a correct statement about the two stocks?

Accepted Answer

A) Stock A is riskier. 
B) Stock B is riskier. 
C) The stocks have the same risk. 
D) We would need to know if the markets are efficient to answer this question. 
A) Stock A is riskier. 
B) Stock B is riskier. 
C) The stocks have the same risk. 
D) We would need to know if the markets are efficient to answer this question.

Question 13

Which of the following is incorrect?

Accepted Answer

A) Technical analysis is expected to work if markets are weak-form efficient. 
B) If markets are strong-form efficient then they must also be weak-form efficient. 
C) It is not likely that the market is strong-form efficient. 
D) None of these statements are incorrect. 
A) Technical analysis is expected to work if markets are weak-form efficient. 
B) If markets are strong-form efficient then they must also be weak-form efficient. 
C) It is not likely that the market is strong-form efficient. 
D) None of these statements are incorrect.

Question 14

A manager believes his firm will earn a 12 percent return next year. His firm has a beta of 1.2, the expected return on the market is 8 percent, and the risk-free rate is 3 percent. Compute the return the firm should earn given its level of risk and determine whether the manager is saying the firm is undervalued or overvalued.

Accepted Answer

A) 9 percent, undervalued 
B) 9 percent, overvalued 
C) 13.8 percent, undervalued 
D) 13.8 percent, overvalued 
A) 9 percent, undervalued 
B) 9 percent, overvalued 
C) 13.8 percent, undervalued 
D) 13.8 percent, overvalued

Question 15

Hastings Entertainment has a beta of 1.24. If the market return is expected to be 10 percent and the risk-free rate is 4 percent, what is Hastings' required return?

Accepted Answer

A) 11.44 percent 
B) 12.44 percent 
C) 14.96 percent 
D) 16.40 percent 
A) 11.44 percent 
B) 12.44 percent 
C) 14.96 percent 
D) 16.40 percent

Question 16

You have a portfolio consisting of 20 percent Boeing (beta = 1.3) and 40 percent Hewlett-Packard (beta = 1.6) and 40 percent McDonald's stock (beta = 0.7). How much market risk does the portfolio have?

Accepted Answer

A) This portfolio has 18 percent less risk than the general market. 
B) This portfolio has 28 percent more risk than the general market. 
C) This portfolio has 18 percent more risk than the general market. 
D) This portfolio has 28 percent less risk than the general market. 
A) This portfolio has 18 percent less risk than the general market. 
B) This portfolio has 28 percent more risk than the general market. 
C) This portfolio has 18 percent more risk than the general market. 
D) This portfolio has 28 percent less risk than the general market.

Question 17

The annual return on the S&P 500 Index was 18.1 percent. The annual T-bill yield during the same period was 6.2 percent. What was the market risk premium during that year?

Accepted Answer

A) 6.2 percent 
B) 11.9 percent 
C) 18.1 percent 
D) 24.3 percent 
A) 6.2 percent 
B) 11.9 percent 
C) 18.1 percent 
D) 24.3 percent

Question 18

Which of the following is incorrect?

Accepted Answer

A) Most firms would want to sell additional shares of common stock if they feel their stock is undervalued. 
B) Most firms would not want to repurchase shares of common stock if they feel their stock is overvalued. 
C) It is important for financial managers to understand market efficiency because it helps them understand how their stock prices will react to different types of decisions and news announcements. 
D) None of these statements are incorrect. 
A) Most firms would want to sell additional shares of common stock if they feel their stock is undervalued. 
B) Most firms would not want to repurchase shares of common stock if they feel their stock is overvalued. 
C) It is important for financial managers to understand market efficiency because it helps them understand how their stock prices will react to different types of decisions and news announcements. 
D) None of these statements are incorrect.

Question 19

IBM's stock price is $22, it is expected to pay a $2 dividend, and analysts expect the firm to grow at 10 percent per year for the next five years. TDI's stock price is $10, it is expected to pay a $1 dividend, and analysts expect the firm to grow at 12 percent per year for the next five years. What is the difference in the two firms' required rate of returns?

Accepted Answer

A) 2.91 percent 
B) 1.82 percent 
C) 2.03 percent 
D) 3.23 percent 
A) 2.91 percent 
B) 1.82 percent 
C) 2.03 percent 
D) 3.23 percent

Question 20

Stock A has a required return of 19 percent. Stock B has a required return of 11 percent. Assume a risk-free rate of 4.75 percent. Which of the following is a correct statement about the two stocks?

Accepted Answer

A) Stock A is riskier. 
B) Stock B is riskier. 
C) The stocks have the same risk. 
D) We would need to know if the markets are efficient to answer this question. 
A) Stock A is riskier. 
B) Stock B is riskier. 
C) The stocks have the same risk. 
D) We would need to know if the markets are efficient to answer this question.

Which of the following statements is incorrect regarding how beta is calculated?

You have a portfolio with a beta of 3.1. What will be the new portfolio beta if you keep 85 percent of your money in the old portfolio and 15 percent in a stock with a beta of 4.5?

Which of the following is correct?

A company has a beta of 3.75. If the market return is expected to be 20 percent and the risk-free rate is 9.5 percent, what is the company's required return?

If the risk-free rate is 8 percent and the market risk premium is 2 percent, what is the required return for the market?

Which of these is the set of probabilities for all possible occurrences?

How might a large market risk premium impact people's desire to buy stocks?

Which of the following is typically considered the return on U.S. government bonds and bills and equals the real interest plus the expected inflation premium?

Which of the following are the stocks of small companies that are priced below $1 per share?

You have a portfolio with a beta of 1.25. What will be the new portfolio beta if you keep 80 percent of your money in the old portfolio and 20 percent in a stock with a beta of 1.75?

Investor enthusiasm causes an inflated bull market that drives prices too high, ending in a dramatic collapse in prices is known as:

Stock A has a required return of 12 percent. Stock B has a required return of 15 percent. Assume a risk-free rate of 4.75 percent. Which of the following is a correct statement about the two stocks?

Which of the following is incorrect?

Hastings Entertainment has a beta of 1.24. If the market return is expected to be 10 percent and the risk-free rate is 4 percent, what is Hastings' required return?

You have a portfolio consisting of 20 percent Boeing (beta = 1.3) and 40 percent Hewlett-Packard (beta = 1.6) and 40 percent McDonald's stock (beta = 0.7). How much market risk does the portfolio have?

The annual return on the S&P 500 Index was 18.1 percent. The annual T-bill yield during the same period was 6.2 percent. What was the market risk premium during that year?

Which of the following is incorrect?

Stock A has a required return of 19 percent. Stock B has a required return of 11 percent. Assume a risk-free rate of 4.75 percent. Which of the following is a correct statement about the two stocks?

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money 1: Analyzing Single Cash Flows

Time Value of Money 2: Analyzing Annuity Cash Flows

Understanding Financial Markets and Institutions

Valuing Bonds

Valuing Stocks

Characterizing Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Weighing Net Present Value and Other Capital Budgeting Criteria

Working Capital Management and Policies

Filters

Exam 10: Estimating Risk and Return

Which of the following statements is incorrect regarding how beta is calculated?

You have a portfolio with a beta of 3.1. What will be the new portfolio beta if you keep 85 percent of your money in the old portfolio and 15 percent in a stock with a beta of 4.5?

Which of the following is correct?

A company has a beta of 3.75. If the market return is expected to be 20 percent and the risk-free rate is 9.5 percent, what is the company's required return?

If the risk-free rate is 8 percent and the market risk premium is 2 percent, what is the required return for the market?

Which of these is the set of probabilities for all possible occurrences?

How might a large market risk premium impact people's desire to buy stocks?

Which of the following is typically considered the return on U.S. government bonds and bills and equals the real interest plus the expected inflation premium?

Which of the following are the stocks of small companies that are priced below $1 per share?

You have a portfolio with a beta of 1.25. What will be the new portfolio beta if you keep 80 percent of your money in the old portfolio and 20 percent in a stock with a beta of 1.75?

Investor enthusiasm causes an inflated bull market that drives prices too high, ending in a dramatic collapse in prices is known as:

Stock A has a required return of 12 percent. Stock B has a required return of 15 percent. Assume a risk-free rate of 4.75 percent. Which of the following is a correct statement about the two stocks?

Which of the following is incorrect?

Hastings Entertainment has a beta of 1.24. If the market return is expected to be 10 percent and the risk-free rate is 4 percent, what is Hastings' required return?

You have a portfolio consisting of 20 percent Boeing (beta = 1.3) and 40 percent Hewlett-Packard (beta = 1.6) and 40 percent McDonald's stock (beta = 0.7). How much market risk does the portfolio have?

The annual return on the S&P 500 Index was 18.1 percent. The annual T-bill yield during the same period was 6.2 percent. What was the market risk premium during that year?

Which of the following is incorrect?

Stock A has a required return of 19 percent. Stock B has a required return of 11 percent. Assume a risk-free rate of 4.75 percent. Which of the following is a correct statement about the two stocks?

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money 1: Analyzing Single Cash Flows

Time Value of Money 2: Analyzing Annuity Cash Flows

Understanding Financial Markets and Institutions

Valuing Bonds

Valuing Stocks

Characterizing Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Weighing Net Present Value and Other Capital Budgeting Criteria

Working Capital Management and Policies

Filters